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PeopleSoft Refund Program is Another Obstacle for Oracle

July 2003

PeopleSoft Refund Program is Another Obstacle for Oracle

Thursday July 3, 2:57 pm ET 

NEW YORK (Dow Jones)--PeopleSoft Inc.'s unusual money-back guarantee not only helped it avoid a second-quarter shortfall, but fortifies its defenses against Oracle Corp.'s hostile takeover. 

Oracle could be on the hook for up to $354 million in refunds if it acquires PeopleSoft in the next year and says it will stop selling or updating PeopleSoft's products within two years, PeopleSoft said in documents filed Thursday with the Securities and Exchange Commission.

Although the money-back guarantee gave PeopleSoft customers an incentive to buy, it also "provides some additional measure of a poison pill" or takeover defense against Oracle, said Ken Marlin, managing partner of Marlin & Associates, a boutique New York investment bank. 

In the tumultuous final weeks of June, PeopleSoft promised its customers refund payments equal to two to five times their software license fees, under certain circumstances, in the case of a takeover. The guarantee was included in about half of its second-quarter transactions, executives said.

PeopleSoft, which has rejected two proposals from Oracle, said in Thursday's filing that it "hopes that any acquirer would continue the support and development of our products." It also said it's unlikely the refunds will ever be exercised. 

Oracle accused its rival of using "one-time gimmicks" to avoid a quarterly shortfall and putting management's interests above those of shareholders. 

"This is a scorched-earth policy that is meant to entrench management and reduce the value of the company," said Jim Finn, an Oracle spokesman, when asked about the money-back guarantee. 

When Oracle announced its takeover plans June 6, executives initially said they would stop developing and selling PeopleSoft's products. Oracle since has eased its stance and now promises to provide support to PeopleSoft customers for 10 years. 

" We have consistently said the acquisition doesn't make any sense unless we can keep those customers happy, and that's going to be our goal," said Jennifer Glass, another Oracle spokesperson. 

But PeopleSoft's guarantee goes beyond Oracle and beyond providing product support. It would require any acquirer to continue selling licenses to new customers and provide updates or new releases of PeopleSoft products. 

Some observers said Oracle's liability from the money-back guarantee is small since customers are unlikely to ask for a refund on long-term, complicated software projects. "Oracle will try to treat customers in such a way there's no need for them to ask for their money back," said Marlin. 

The money-back guarantee aside, investors and analysts said PeopleSoft's better-than-expected second quarter may force Oracle to raise its $19.50-a-share bid if it hopes to succeed. Oracle's current tender offer expires at midnight New York time Monday, unless the offer is extended. 

"Given PeopleSoft's strong (second-quarter) results, we believe Oracle's offer would have to be toward the higher end of our original $20-to-$25 range" of potential offers, wrote Neil Herman, an analyst at Lehman Brothers, in a research note Thursday. 

He rates PeopleSoft stock at overweight, Oracle's at equal weight and doesn't own either stock. Lehman may be seeking to provide investment-banking services to PeopleSoft in the next three months. 

PeopleSoft shares ended Thursday's holiday-shortened session down 14 cents, or 0.8%, at $17.84. It is trading at an 8.5% discount to Oracle's all-cash offer as investors remain skeptical Oracle will ultimately succeed. Oracle shares closed Thursday down 30 cents, or 2.4%, at $12.15.

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